Key Tronic Corporation

You are currently holding for today's Keytronic fiscal year 2026 third quarter investor call. We are admitting additional participants and plan to be underway shortly. We appreciate your patience and ask that you please remain on the line. Good day, and welcome to the Keytronic fiscal year 2026 third quarter investor call. Today's conference is being recorded. After the presentation, we will begin the question and answer period. At this time, I would like to turn the call over to Tony Voorhees. Please go ahead.

Good afternoon, everyone. I am Tony Voorhees, Chief Financial Officer of Keytronic. I would like to thank everyone for joining us today for our investor conference call. Joining me here at our Spokane, Washington headquarters is Brett Larson, our President and Chief Executive Officer. As always, I would like to remind you that during the course of this call, we might make projections or other forward-looking statements regarding future events of the company's future financial performance. Please remember that such statements are only predictions. Actual events or results may differ materially. For more information, you may review the risk factors outlined in the documents the company has filed with the SEC, specifically our latest 10-K and quarterly 10-Qs. Please note that on this call, we will discuss historical, financial, and other statistical information regarding our business and operations. Some of this information is included in today's press release. During this call, we will also reference slides that accompany our discussion. The slides can be viewed with the webcast and the link can be found on our investor relations website. In addition, the slides together with the recorded version of this call will be available on the investor relations section of our website. We will also discuss certain non-GAAP financial measures on this call. Additional information about these non-GAAP measures and the reconciliations to the most directly comparable GAAP measures are provided in today's press release, which is posted to the Investor Relations section of our website. For the third quarter of fiscal year 2026, we reported total revenue of $89.6 million, compared to $112 million in the same period of fiscal year 2025. Year-over-year revenue for the third quarter of fiscal year 2026 continued to be adversely impacted by reduced demand from a legacy customer and an end-of-life program. Additionally, we also faced temporary challenges during the quarter related to winter storm fern in the southern U.S. customer design delays on a new program with a legacy customer, and delays in receiving allocated components on a separate new program. For the first nine months of fiscal year 2026, our total revenue was $284.6 million compared to $357.4 million in the same period of fiscal year 2025. Despite these short-term impacts, we are already seeing activity improve, with demand returning from several legacy customers and multiple new programs continue to launch and ramp driving expected revenue growth for the fourth quarter. Importantly, even with lower revenue in the third quarter of fiscal year 2026, we delivered an improvement in gross margin compared to the prior year period. This demonstrates the operating efficiencies gained from our cost-cutting initiatives during the past two years. Gross margin was 8% and operating margin was negative 0.3% in the third quarter of fiscal year 2026, up from 7.7% and negative 0.4%, respectively, in the same period of fiscal year 2025. Excluding the charges related to the China closure, which we will discuss in a moment, the adjusted gross margin was 8.5% for the third quarter of fiscal year 2026, up from 8.4% in the same period of fiscal year 2025. These results demonstrate that our business today is structurally more efficient and better positioned to generate margin as volume returns. In line with our long-term strategic plan, we continued to prepare for anticipated long-term growth by executing our nearshoring and tariff mitigation strategies to reduce costs while maintaining the diversity and flexibility of our key locations and capabilities. During the quarter, We continue to wind down manufacturing operations in China, shifting more production to our expanding facilities in the U.S. and Vietnam. The China wind-down is expected to be completed by the end of the current fiscal year and anticipated to save approximately $1.2 million per quarter following completion. As top-line growth returns, we anticipate margins to be strengthened by the improvements in our operating efficiencies and the positive impact of our strategic cost savings initiatives. We also believe the recent cost savings initiatives have made us more competitive when quoting new program opportunities. As production volumes increase and our operational adjustments take full effect, we expect to see greater leverage on fixed costs, enhanced productivity, and a more streamlined supply chain, all contributing to stronger financial performance. The reduction in revenue had a significant impact on our bottom line. The net loss was $2.6 million, or 24 cents per share, for the third quarter of fiscal year 2026, compared to net loss of 0.6 million, or six cents per share, for the same period of fiscal year 2025. For the first nine months of fiscal year 2026, the net loss was $13.5 million or $1.24 per share compared to net loss of $4.4 million or $0.41 per share for the same period of fiscal year 2025. Our adjusted net loss was $2.8 million or $0.26 per share for the third quarter of fiscal year 2026. compared to adjusted net income of $0.1 million, or one cent per share, for the same period of fiscal year 2025. For the first nine months of fiscal year 2026, our adjusted net loss was $3.9 million, or 36 cents per share, compared to adjusted net loss of $1.2 million, or 11 cents per share, for the same period of fiscal year 2025. Our focus on operating discipline continues to support a strong balance sheet. Our inventory for the third quarter of fiscal 2026 is down $13.5 million, or 14% from a year ago. Our current ratio was 2.1 to 1, compared to 2.7 to 1 from a year ago. At the same time, accounts receivable DSOs were at 85 days. compared to 92 days a year ago, reflecting stronger collection on receivables. Year-to-date cash flow provided by operations for the first nine months of fiscal year 2026 was approximately 10 million, as compared to 10.1 million for the same period of fiscal year 2025. Our continuing ability to generate cash from operations has allowed us to reduce debt year-over-year by approximately $14.3 million and helps position us well as demand accelerates and new programs ramp. Capital expenditures in the third quarter were minimal, while year-to-date total capital expenditures through the third quarter were approximately $3.7 million. We expect CapEx for the full year to be around $5 to $8 million. largely spent on new innovative production equipment and automation. While we're keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment, SMT equipment, and plastic molding capabilities, utilize leasing facilities, and make efficiency improvements to prepare for growth and add capacity. As we move further into fiscal 2026, we continue to face a lot of global economic uncertainties and volatile trade policies. Nevertheless, we are increasingly encouraged by the demand trends we're seeing as we enter the fourth quarter. Activity with several longstanding customers is improving, new programs are ramping, and our expanded US and Vietnam capacity is generating increased customer interest. Our improved operating efficiency makes us more competitive, resulting in a stronger pipeline of potential new business, and we remain focused on further improving our profitability. Our production backlog has grown, and we believe that we are increasingly well positioned to win new programs and profitably expand our business. Due to the uncertainty of timing of new product ramps in light of continued macroeconomic uncertainty, we are not providing forward-looking guidance in the fourth quarter of fiscal year 2026. That's it for me. Brett?

Thanks, Tony. Despite reduced demand from certain long-standing customers and the delays in production caused by winter storm fern in the third quarter, We're encouraged by the improvements in our operating efficiencies and by the gradual rebound in demand from several long-standing customers and the continued growth of new programs that we're seeing in the fourth quarter. We continue to provide our customers with options to better manage macroeconomic uncertainties and enhance our potential for profitable long-term growth. As we seize manufacturing operations in China, continue to right-size our Mexico facility and build out new production capacity in the U.S. and Vietnam. Our improved operating efficiency has made us more competitive, and we expect our revenue to gradually begin to rebound and see a return to profitability in the fourth quarter of fiscal 2026. As part of our long-term strategy and in recognition of the continuing geopolitical tensions, tariff uncertainties, and increasing costs associated with China-based production, we are winding down our facilities there and transferring programs to Vietnam. We anticipate savings generated from the shutdown to approximate $1.2 million per quarter once fully executed. As part of our global sourcing strategy, we will, however, continue to operate in China with a small team focused on sourcing critical components locally. Over the past 24 months, we have also reduced our total headcount by approximately 42 percent in Mexico and have begun transferring some programs from Mexico to the U.S. and Vietnam. Our Mexico facility continues to offer a unique solution for tariff mitigation under the existing USMCA tariff agreement, giving the sustained trend of continued wage increases in Mexico We have streamlined our operations, increased efficiencies, and invested in automation to be more cost competitive in the market. Due to the successful cost reduction and streamlining production processes, we have recently seen an increase in the quoting volume and probability of landing new programs manufactured in our Mexican facilities. We've also seen an influx of new customer visits and audits of our Juarez campus as of late that demonstrates we are competitive for a growing variety of quoting opportunities. Our improved cost structure in Mexico is anticipated to lead to new programs and growth over the longer term. We are very excited about the recent investments made in the U.S. and Vietnam to build out capacity and new capabilities to meet evolving customer demand. You will recall that we opened our new technology and resource and development location in Arkansas during the first quarter of fiscal 2026. Our US based production provides customers with outstanding flexibility, engineering support and ease of communications. We expect double digit growth in our facility in Arkansas during the upcoming fiscal year. You also recall that we have recently doubled our manufacturing capacity in Vietnam. that now has the capability to support anticipated future medical device manufacturing. Our Vietnam-based production offers the high-quality, low-cost choice that was associated with China in the past. In coming years, we expect our Vietnam facility to play a major role in our growth. We anticipate that these new facilities in the US and Vietnam will enable us to benefit from customer demand for rebalancing their contract manufacturing and mitigate the severe impact and uncertainties surrounding the tariffs on goods and critical components. By the end of fiscal 2026, we expect approximately half of our manufacturing to take place in our U.S. and Vietnam facilities. These initiatives reflect the longstanding customer trends, both to nearshore as well as de-risk the potential adverse impact of tariff increases and geopolitical tensions. During the third quarter of fiscal 2026, we won new programs in automotive technology, industrial tooling, pest control, and industrial power management. Our improved operating efficiency has also made us more competitive, increasing our sales pipeline, particularly in such steady growth sectors as utilities and data center equipment. Despite the many uncertainties and disruptions in global markets, our strong pipeline of potential new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing. In light of the significant transitions and streamlining initiatives we've made in the past two years, it's worth reviewing our key competitive advantages going forward. The combination of our flexible global footprint and our expansive design capabilities continues to be extremely effective in capturing new business. First, we've enhanced our cost and tariff efficiency and the flexibility of our global manufacturing footprint. We expect that global tariff wars and geopolitical tensions will continue to drive OEMs to re-examine their traditional outsource strategies. Over time, the decision to onshore production is becoming more widely accepted as a smart, long-term strategy. Second, many of our manufacturing program wins are predicated upon Keytronic's deep and broad design services. And once we have completed the design and ramped it into production, we believe our knowledge of a program's specific design challenges make that business extremely sticky. We anticipate a continued increase in the number and capability of our design engineers in coming quarters. Third, we continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection, blow, gas assist, multi-shot, as well as PCB assembly, metal forming, painting and coating, complex high-volume automated assembly, and the design, construction, and operation of complicated test equipment. We believe this expertise will increasingly set us apart from our competitors of a similar size. While the global market uncertainties have created some delays to new product launches for us, our suppliers and our customers, we believe geopolitical tensions and heightened concerns about tariffs and supply chains will continue to drive the favorable trend of contract manufacturing returning to North America as well as to our expanding Vietnam facilities. We're expecting revenue growth in the coming quarters from new programs launching in the U.S., Mexico, and Vietnam. Significant improvements in our operating efficiencies are creating a stronger pipeline of potential new business. Over the long term, we remain very encouraged by our cost reductions made over the past two years to become more market competitive. Our increasing cash flow generated from operations enhance global manufacturing footprint, and the innovations of our design engineering. All these initiatives have increased our potential for profitable growth. This concludes the full portion of our presentation. Toni and I will now be pleased to answer your questions.